This is not a new phenomenon. Economic history is replete with instances of the ill effects of inflation – the thief upon humanity. From the Mongol Yuan Dynasty, the 15th century, the 17th century and later to the periods of the World Wars world economies have borne witness to the impact of inflation. In our times, a simplified understanding of inflation would be this: Money (Currency) is really a tally of debt. Inflation happens when that tally is not perfectly aligned with debt. Simple. There was a time when gold was the basis by which governments printed and issued fiat currency. The US ended the pegging of the US dollar to a gold standard in 1933 and at the Bretton Woods conference in 1944, many changes were implemented including the setting up of the International Monetary Fund (IMF). As a result of these changes governments could print as much currency as they wanted. The tally (measure) of currency being printed was not aligned with the measure of debt anymore. And thus, was birthed the financial demon called “inflation”. WFD – a term I coined to stand for Weapon of Financial Destruction. This is well and truly what inflation is, you can neither ban it, isolate it, bury it nor can you create sanctions against it. Abstract yet existential, virtual yet real, invisible yet impactful. Inflation robs us of our financial capability, our savings and our financial future. But isn’t progress and growth the antidote?”, you ask. It is, and it is not. It is, when we grow at a steady “acceptable pace” and it is not, when this critical balance is disrupted. Economies are always in a race for growth because financial growth and superiority lends a sense of economic stability to a country. To fuel this race, we print money. More of it, and then even more of it to fuel our growth ambitions. This upsets the fine balance between the tally of currency printed and debt. This sets into motion a vicious cycle of reducing the purchasing power of currency which in turn nudges up the prices of commodities giving rise to a general sustained increase in prices of all goods and services resulting in an outcome we term “Inflation”.
“So what’s the damage to me?”, you ponder. Well, it is simple. Real return on your savings is a measure of the difference between interest rates and inflation (Real Return = Rate of Interest – Rate of Inflation). The higher the rate of inflation, the lower will be the growth in your savings. Indians are amongst the highest savers, globally. And no matter which part of the world you reside in, inflation is everywhere – and at very menacing rates. The US, the UK, most of Europe, China, India, Asian economies, everywhere, bankers and economists are talking about multidecadal high levels of inflation. Such high levels take a long time to recede, and as such we are being robbed, if we take no action to mitigate the risk. If inflation is a disease, is interest rate change the cure? Click here to find out.
